Aston factor may add to Boardwalk

From the day the $5.1 billion three-way merger between
Whitehaven Coal
and
Nathan Tinkler
’s
Aston Resources
and Boardwalk Resources was announced in December, the high price being paid for the unlisted Boardwalk has raised eyebrows.

The suspicion by many that Boardwalk is worth well below the $393 million to $491 million implied by the deal was validated on Friday when independent expert PwC valued the coal junior at $200 million to $330 million.

In fact, technical expert Minarco-MineConsult (MMC) valued Boardwalk at the equivalent of just $170.2 million to $264.4 million in the report, including the cash being put into the vehicle by Tinkler and his backers at Farallon Capital Partners as part of the deal and holdings in listed groups.

Because this is a scrip transaction, the high price being paid for Boardwalk is dilutive to Aston shareholders apart from Tinkler and Farallon.

CLSA analyst James Stewart values Boardwalk at $200 million and, therefore, estimates Tinkler is receiving a premium of 18 per cent to 27 per cent on the value of assets he is vending into Whitehaven over and above what minority shareholders in Aston are receiving.

That’s attributable to the high price being paid for Boardwalk and notably excludes undisclosed advisory fees on the deal payable to his group, Queen Street Capital, and future royalty payments payable to one of his private companies on some Boardwalk assets.

Boardwalk has four key exploration assets, and the MMC technical report shed some welcome light on the projects and their development options.

The Ferndale project in the Hunter Valley is perhaps the best known to the market because Boardwalk’s partner is listed coal explorer
Coalworks
. (Boardwalk also owns a 19.9 per cent stake in Coalworks.)

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Coalworks recently released an inferred resource of 743 million tonnes, but the scheme booklet said it had not been reviewed by Boardwalk. Boardwalk has a resource target of up to 453 million tonnes for the project. CLSA’s Stewart said a large proportion of the Coalworks resource could prove uneconomic given the thin seams and high ash content.

There are also question marks over the other Boardwalk projects. MMC noted Sienna is located very close to the town of Middlemount in Queensland where it would be “highly visible" and is likely to be subject to environmental constraints and new urban planning rules.

Meanwhile, Dingo has good PCI resources and is adjacent to Cockatoo Coal’s Baralaba mine. But like that operation, Dingo is probably limited to mining in small, isolated pits in a heavily faulted zone. Tinkler has touted Dingo as a likely producer of up to six million tonnes a year, but Stewart thinks a top of two million tonnes is more realistic.

Finally, industry sources note the Monto project, which has had only $185,000 spent on exploration so far, has yet to show whether it could be commercially viable.

It’s worth noting that despite these issues, the Whitehaven team has taken the view the price being paid for Boardwalk represents “fair value" for its own shareholders. The Whitehaven team, led by managing director
Tony Haggarty
, has a very good reputation for being astute investors. However, some suspect paying a high price for Boardwalk was viewed as a necessary evil to get the far more important Aston transaction across the line.

In effect, Whitehaven may consider the price being paid for Boardwalk and Aston to be a combined headline price, with the value of the individual components not particularly important.

However, such a take on the deal does not benefit the minority holders of Aston.

So it is welcome news that alongside the scheme booklet, came the announcement that Tinkler and Farallon no longer plan to vote on the Aston scheme in light of their holdings in Boardwalk.

That means that if minority holders in Aston are vocal enough about any distaste for the price being paid for Boardwalk, they could effectively hold Tinkler and Whitehaven hostage by making clear they intend to vote against the Aston scheme.

If strong enough, it could trigger a renegotiation that would boost the price being paid to Aston holders and lower the proceeds to Tinkler and Farallon without raising the price of the deal to Whitehaven.

But at this point, a shareholder revolt among the Aston minorities appears unlikely. For starters, Tinkler demonstrated that leaving him in charge of Aston is a rather risky option. Shares in the aspiring coalminer plunged 11 per cent in one day in November after Tinkler turfed a well-regarded management team and was installed as chairman.

The market wants Haggarty running Aston rather than Tinkler, who has agreed to take a hands-off approach by not even being a director of the merged entity.

The deal will also allow for at least $510 million of synergies and, for Aston holders, will offset the risk of delays to the development of the Maules Creek project due to slow NSW planning approvals by giving them access to Whitehaven’s cash flow.

Finally, the local market is crying out for a major listed coalminer and a combined Whitehaven-Aston is set to be the preferred choice for many. Fund managers, therefore, have a generally positive view of the transaction despite the Boardwalk valuation issue and most prefer this as an investment option over the merged Yancoal-Gloucester Coal.